Budgeting Practices and Theories

This assignment delves into the multifaceted world of budgeting, encompassing both practical implementation and underlying theoretical frameworks. It examines diverse budgeting methods, analyzes agency theory and its implications for participative budgeting, and investigates the influence of factors like overconfidence on capital budgeting decisions. The provided readings offer insights into budgeting in various contexts, including education, public administration, and corporate finance.

MANAGING FINANCIAL
RESOURCES AND
DECISIONS

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
AC 1.1 Sources of finance..........................................................................................................3
A.C. 1.2 Assessment of implications of financial sources..........................................................4
AC 1.3 Evaluation of appropriate source of finance...................................................................5
AC 2.1 Assessment of cost of sources of finance.......................................................................6
AC 2.2 importance of financial planning....................................................................................7
AC 2.3 Types of information needs for decision makers............................................................7
AC.2.4 Impact of finance on financial statements......................................................................8
AC 3.1 analysing cash budget and decision for business proposal.............................................8
AC 3.2 unit cost calculations and pricing decisions...................................................................9
AC 3.3 financial appraisal...........................................................................................................9
TASK 2..........................................................................................................................................10
A.C 4.1 Financial statements....................................................................................................10
AC 4.2 Comparison of formats of financial statements............................................................12
AC 4.3 Interpretation of financial ratios ..................................................................................12
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................15

INTRODUCTION
It is very important for a business to manage its financial resources and take such
decisions that helps in the growth of business and helps it expand. The sustainability of business
is another important aspect. The financial decisions are very critical in nature and they are to be
taken after thorough critical assessment of the sources of finance. It is the science of money
management. Managing financial resources and taking relevant decisions is what an entrepreneur
has to do. In this report the company PQR LTD. Is a new venture and they want to raise capital
from the market. So this report includes all the aspects that the entrepreneur has to look before
proposing a business proposal( Bierman, and midt 2012). They has to make a plan by keeping in
mind the objective of profit maximisation. This report further includes the analysis of cash
budget and comparison of financial ratios with the importance of finance on financial
statements.
TASK 1
AC 1.1 Sources of finance
An entrepreneur wants to launch a business proposal for which he has £ 20000 for
investing purpose as capital but he needs to borrow £ 280000 for making a bid of
£300000. for this they have to raise funds from the capital market and they
are a newly set up company. It is true that business are more profitable if
there is more risk involves(Brown Evans and Moser 2010). There are
various sources of finance that they are considering for raising the capital
for their proposal. These resources are available at various costs and they
have to decide which will be beneficial for the. The sources available to
them could be external as well as internal .
External sources available are :
 Debentures: these are the fund borrowed from the public and
contains a written acknowledgement. It comprises of terms and
conditions regarding its interest payment and repayment of debt.
 Capital market: the another way to raise capital from the market is
by issuing its shares in the market or by issuing right shares to the
existing shareholders at a comparatively low prices than the market

price. They can raise it by either preference shares or by equity
shares.
 Bank borrowings: the company can avail the option of borrowing
from banks directly. They have to go under certain formalities and can
get the loan required.
 Bank overdraft: It allows the company to withdraw funds even if the
balance of their account is zero. It will lead to higher rate of interest.
 Franchising: It helps the business to so the operations by lending
their name to other party and they run the business(Ezzamel Robson
and Stapleton 2012). It costs them less.
Internal sources
 Retained Earnings: these are the earnings of the owners of the
business and these are not spend and are invested back in the
business for further investment purposes.
A.C. 1.2 Assessment of implications of financial sources.
The financial sources are available to the business but they all have various benefits and
certain limitations attached to them. The implications has a great impact on the working of the
business as they need to be selected very carefully. If the financial sources are not taken with
proper evaluation they can hinder the operations of business. Here in this case scenario the
entrepreneur wants to raise funds of £ 280000. the company has to critically evaluate the pros
and cons of every source. As if he gets the fund from debentures or from bank borrowings he has
to go for various legal proceedings and fixed repayment period. Etc. there are some implications
attached to it and these may be in the form of legal(Gervais Heaton and Odean 2011),
financial, dilution of control and bankruptcy.
Sources Legal Financial Bankruptcy Dilution of
control
Shares The voting rights
are not available
with them.
The repayment is
not the concerned
issue but they are
obligatory to give
In case of
bankruptcy the
preference
shareholders are
Control is not
diluted

dividends paid first.
Bank borrowings The bank has the
right to seize the
asset if the person
makes default in
payment.
In case of loans
the repayment
period and time is
fixed and they are
paid on periodic
basis like
monthly, yearly,
half yearly.
In case of
bankruptcy the
bank claims the
collateral security
and they get the
payment first.
And if something
left then it is paid
to the other
creditors.
-
Bank Overdraft Legal
documentation is
done critically
The charges has
to be paid by the
company and the
bank does not
care about the
situation they
charge penalties
for the additional
time taken for the
repayment.
They claim first
and the company
is obliged to
repay them first.
Not diluted
Franchising Legal implication
is not on the
franchisor.
The implications
lies on the
franchisee who
has taken the
project.
The franchisee
must pay the
amount left to the
franchisor.
Not diluted

AC 1.3 Evaluation of appropriate source of finance
The pros and cons are attached to every source of finance and the proper source of
finance must be selected after judging them critically and by assessing that which source will be
better for the business project by keeping in mind its nature and type.
Sources of finance Pros Cons
Capital market (equity
finance )
Does not have to keep up with
managing the costs for paying
interest or other costs. Can
have the money invested back
for further use.
Costly , time consuming and
loss of ownership
Loans Ownership is not lost Penalties are very high
Franchisee Success rate is high and needs
very little investment
Profits are shared.
Debentures Helps in provioding long term
funds and at a relatively low
cost and interest rate is also
low.
Increase of risk perception in
the mind of investors
Overdraft Paper work is less and gets the
benefit of interest cost.
High penalties and loss of
credibility is payment is not
done.
AC 2.1 Assessment of cost of sources of finance
The project is funded by doing the assessment first and evaluating them on the cost
basis . The rates at which they are available are assessed. The cost of raising those funds which
the company has to pay is the cost of capital and it is different for every source.
Capital market: it is the financing cost that the organisation has to pay in return for paying
back. These are generally appears as annual rates like 7% or 9.2%. the cost of equity is assessed
by calculating the market risk premium with equity beta and risk rate.

Debentures: It includes the cost of interests. The cost is assessed by calculating the cost of
borrowing and the debenture cost in this market is around 7.5%.
Bank Overdraft : The HSBC has allowed the facility of overdraft to some of its customers and
they charge high interest rate for this facility(Hope and Fraser 2013). The customers are
offered to take loan even if the bank account has zero balance and they are given the relaxation
to pay later. The penalty rate is 13%
Bank Borrowings: The business proposal can be funded from the bank borrowings and these are
available at HSBC from 11 % - 18.4 % the advantage of getting borrowed from bank is that the
company will get tax benefits.
Franchise : The cost of franchisee is very low as compared to the other sources. They need to
just start the business as all the set up needed is already ready.
AC 2.2 importance of financial planning
A financial plan is the situation of an investor's current and future. It is made by
predicting the future state of the investor by evaluating current financial state. It is the process
that helps in forming the objectives and policies and regulation that will help in improving the
financial position of the company and they include adequate financial policies(Joyce, 2011).
The importance of finance planning are:
 the funds required are ensured.
 If the plan is there then it will help in balancing the inflow and outflow of cash .
 It helps the business to make long term objectives and helps to sustain the business.
 It helps in maintaining certainty in situations and market trends and helps in expansion.
 It helps in coping up with uncertainties and coming out of the situations that are creating
hindrance.
 Appropriate financial planning helps a business to be stable and ensure profit
maximisation.
AC 2.3 Types of information needs for decision makers.
There are various types of information that the internal and external decision makers
need. There are certain decision makers which check the viability of the project and managers
have to give the information to them. These decision makers are:
Government: the government needs to know the status of business as they are concern
with the taxation policies, what steps they are taking for the benefit of the society. what CSR

issues they are addressing(Kilfoyle and Richardson 2011) , though the government is not
related to the business but they need information on this.
Stockholders: they are the owner of the company so they need to know the financial
position of the company to take the decisions relevant for the company. They t6ake the financial
decisions of the company.
Creditors: they need the financial information to know that the loan taken by the firm
will be re payed or not. What is their financial conditions.
Suppliers: they need to know the information regarding the raw materials and products.
Employees: the employees of the organisation needs to know the current position of the
company they are working in .
AC.2.4 Impact of finance on financial statements
The source of finance that is choose for the business proposal id bank borrowings (loan)
as the company is new so they cant issue debentures. They can easily take loans and pay interest
on them. The amount of loan will have a impact on the balance sheet of the company. it will
create the risk profile of business and the analyst and investor depends upon. It will increase the
liabilities side of the balance sheet(Lee Johnson and Joyce 2012). The loan indicates an
external liability in the business. The EMI the company pays will have an impact in income
statement as interest payment.
If the company raise capital from other sources say suppose from equity then it will increase the
shareholders fund and will occur on liabilities side. the impact can be measured by the change of
market shares price.
AC 3.1 analysing cash budget and decision for business proposal
For the business proposal a cash budget has been prepared and by analysing it properly ,
certain decisions are made. It includes the inflow and outflow of cash and other expense we get
to the net cash flow part which helps in making the decision whether the project is viable or not.
April May June July August
Cash inflow
Sales 26000 26650 27316.25 27999.15625 28699.13515625
Other income 4800 5400 6600 7000 7400
Total cash inflow 30800 32050 33916.25 34999.15625 36099.13515625

Cash outflow
Operating expense 5200 5330 5463.25 5599.83125 5739.82703125
Rent 6000 6000 7500 7500 7500
Utilities 650 666.25 682.90625 699.97890625 717.4783789063
Misc expenditure 1300 1332.5 1365.8125 1399.9578125 1434.9567578125
Total cash
outflow 13150 13328.75 15011.96875 15199.76796875 15392.2621679687
Net cash flow 17650 18721.25 18904.28125 19799.38828125 20706.8729882812
Opening balance 0 17650 36371.25 55275.53125 75074.91953
Closing balance 17650 36371.25 55275.53125 75074.91953125 95781.7925182813
The above presented cash budget is based on certain assumptions:
 Sales increase at the rate of 25%
 operating expenses are 20% of the revenue.
 Utilities form 25% of the revenue
 miscellaneous expenses are 5%
 Rent remains at 6000 and increased to 7500 after two months.
 The opening balance is zero for the initial year and then the closing balance of first year
becomes the opening balance of the second year and so on.
 The net cash flow is increased from 17650 to 20706 in six months.
 It is a profitable business proposal
(all the above figure are in £)
AC 3.2 unit cost calculations and pricing decisions.
Particulars
Amount
in £
Total variable cost 245000
Total fixed cost 200000
Total cost 445000
Number of units 50000
Cost per unit 8.9

Gross profit margin 45%
Selling price 12.91
For the calculation purpose of unit cost the variable and fixed cost are added up and the total cost
is divided by the no. of units which gives the cost per unit(Libby and Lindsay 2010). As
this is the cost + pricing method the gross profit margin (45%) is added upto the cost per unit and
selling price is derived. it is £ 12.91
AC 3.3 financial appraisal
For obtaining the knowledge about the financial strength and profitability of the business
proposals financial appraisal techniques are used. There are many techniques that can be used in
financial appraisal but here NPV and IRR is calculated for the appraisal. The project is said to be
fit if the net present valuer is positive and profitable is IRR is higher.
Years Cash Flows (in £'s)
2016 75000
2017 1,22,000
2018 1,75,000
2019 2,08,000
2020 2,40,000
Initial Investment 4,30,000
Years Cash Flows (in £'s) PV factor @ 10% Present value
2016 75000 0.91 68181.8181818182
2017 122000 0.83 100826.446280992
2018 175000 0.75 131480.090157776
2019 208000 0.68 142066.798715935
2020 240000 0.62 149021.1175
Total present value 591576.270870718
Less: Initial investment 4,30,000
Net present value 1,61,576

Years Cash Flows (in £'s)
Initial investment -4,30,000
2016 75000
2017 122000
2018 175000
2019 208000
2020 240000
Internal Rate of Return (IRR) 21.32%
The NPV of the business proposal is £1,61,576 and IRR comes at 21.32%
Recommendations
The company should go with the plan of entrepreneur and invest in the business proposal.
As NPV brings out the difference between the present value of inflows and present value of
outflows.
TASK 2
A.C 4.1 Financial statements
Financial statements are the written statements that contain the financial position of the
business. It measures the performance of business in quantifiable terms. There are different
statements for different purposes like income statements for knowing the expenses incurred
against of incomes. Balance sheet tells about the liability and assets that the business own, etc.
the financial statements consists of income statement(Miller O’leary 2010), balance sheet. Cash
flow statement, and owners equity.
The main elements are:
Profit & Loss Statements: it is also known as income statements. It evaluates the companies
financial performance . It tells about the net profit or net loss . If the expenses are more than the
income then loss occurs and if income is more than the expenses then profit occurs. Incomes
includes all the earnings incurred during the specific period it includes income from rents,

interests etc. expenses are included that is incurred in that particular period and it includes bank
charges, wages taxes etc.
Balance Sheet: It comprises of liabilities and assets. Liabilities are something that the business
owe to and assets are the things that they own(Phillips and Costa 2010), balance sheet is the
summary of the business . Assets includes current asset as well as fixed asset. Current assets are
those that can be converted into liquid form and fixed assets are not easily convertible. These
includes buildings, lands, machineries plant etc. and current assets includes inventories, whereas
liabilities are also divided into two categories on the basis of short term and long term. Long
term are the liabilities which remains for the period of more than one year and short term are
paid off within a year.
Cash Flow Statements: this is made for tracking the inflows and outflows of cash. It keeps a
check on the firm and tells that whether the company is able to manage the funds or not. It has to
keep the balance between inflow and outflow of funds and helps in taking the decisions
regarding cash management. The cash flow operates on the basis of operating activities in which
day to day operations are included(Sintomer Herzberg and Röcke 2011). Then investing
activities are recorded that includes inflow and outflow of investing activities like purchase and
sale of assets. Then at last financing activities are taken care of which includes inflow and
outflow of cash from the issue of shares and redemptions. At last the ending amount of cash flow
should be equal to cash in hand.
Statements Of Changes In Equity:
Owners detailed earnings are stated in this statement.
The financial statements are used by many people.
Government: They needed financial statements of the company to know whether they are
abiding by the rules and regulations and following the company standards(Truong Partington
and, Peat 2010). They wanted to know what they are doing for the society.
Competitors: The financial statements are useful for the competitors to know about their
position and their pricing techniques, so that they can make their prices accordingly. By doing
backward calculations prices can be calculated. And annual reports may guide along the way
from where raw materials are gathered.
Customers: The customers who want to invest in their shares need to study the annual reports of
the company and then make a decision whether to invest in it or not.

Employees : The employees of any organisation needs to have the knowledge of financial
information about the company in which they are working in. This helps them to know the
company better and get the rights shares whenever they are offered.
Lenders: They wanted to know the credibility of the business before providing them loan. So the
financial statements helps them to make decisions whether to lend them money or not.
AC 4.2 Comparison of formats of financial statements
The financial statements are differ on the basis of what they report.
Income statement: These statements are simple profit and loss statements that is obtained by
reducing expense from income. At the top revenue items are listed and then expense are listed
and then net profit\ loss are derive.
Balance Sheet: The balance sheet consists of assets and liabilities and they should be equal.
There should be sufficient assets to pay off the liabilities. For small businesses balance sheet is
simple but for large scale business , assets are break down in current and fixed.
Cash Flow Statements: The format of cash flow is simple . Though it has two methods namely
directly and indirect. Usually indirect method is used and it contains three activities viz.,
operation, investing and financing.
AC 4.3 Interpretation of financial ratios
Financial ratios are used to make financial decisions and helps in interpretation tools that
helps business to make decisions. These are really helpful in measuring the performance in terms
of liquidity, market valuation, asset utilisation, profitability etc. the financial ratios are calculated
for checking the trend within the organisation or compare it with outside the organisation. These
ratios are used for both external as well as internal users(Wampler 2010). External user
comprises of investors bot current and potential, competitors, analysts, and internal users are
managers who uses them to evaluate the firms performance.
The financial ratios of Dixon Carphone plc and Vodafone are compared the results
derived are that the profitability ratios are better in 2017 then in 2016 of Dixons plc and same
goes with Vodafone. All the ratios are better in 2017 hence the company is improving and in
better financial position.
Ratios Formula Dixons Carphone plc Vodafone
- - 2017 2016 2017 2016

Gross profit - 664 2185 29254 5761
Net profit - 48 161 10404 11345
Sales revenue - 2576 9738 38346 42227
Profitability ratios
GP ratio GP / NS * 100 25.78% 22.44% 76.99% 13.64%
NP ratio NP / NS * 100 1.86% 1.65% 27.13% 26.87%
Liquidity ratios
Current ratio Current assets / current
liabilities
1.38 .93 0.99 0.69
Quick ratio CA – (Closing stock +
prepaid expenses) / CL
1.13 .55 - -
Debt-equity ratio Debt / equity .33 .17 0.3 0.34
Efficiency ratios
Asset turnover ratio Sales / total assets 1.72 1.41 0.29 0.35
Return on equity - 6.23 5.63 83.29 8.41
CONCLUSION
The above report is presented on the management of financial resources and decisions regarding
it. For starting a business venture an entrepreneur has to undergo various processes and various
decisions has top be taken regarding which source is suitable to raise the capital and what will be
the implication of those. The above report concludes that as the business is new so they cant
issue debentures so they will borrow the funds from the bank and pay interest on them. It will be
paid back in the tenure decided. The cost per unit is calculated at 8.9 and selling price is

12.91GBP. The project is profitable as its NPV is positive and the IRR is high. To conclude this
report it is recommended the project should be accepted and the bid must be approved.

REFERENCES
Books and Journals
Bierman Jr, H. and Smidt, S., 2012. The capital budgeting decision: economic analysis of
investment projects. Routledge.
Brown, J.L., Evans III, J.H. and Moser, D.V., 2010. Agency theory and participative budgeting
experiments. Journal of Management Accounting Research. 21(1). pp.317-345.
Ezzamel, M., Robson, K. and Stapleton, P., 2012. The logics of budgeting: Theorization and
practice variation in the educational field. Accounting, organizations and society. 37(5).
pp.281-303.
Gervais, S., Heaton, J.B. and Odean, T., 2011. Overconfidence, compensation contracts, and
capital budgeting. The Journal of Finance. 66(5). pp.1735-1777.
Hope, J. and Fraser, R., 2013. Beyond budgeting: how managers can break free from the annual
performance trap. Harvard Business Press.
Joyce, P.G., 2011. The Obama Administration and PBB: Building on the Legacy of Federal
Performance-Informed Budgeting?. Public Administration Review. 71(3). pp.356-367.
Kilfoyle, E. and Richardson, A.J., 2011. Agency and structure in budgeting: thesis, antithesis and
synthesis. Critical Perspectives on Accounting. 22(2). pp.183-199.
Lee Jr, R.D., Johnson, R.W. and Joyce, P.G., 2012. Public budgeting systems. Jones & Bartlett
Publishers.
Libby, T. and Lindsay, R.M., 2010. Beyond budgeting or budgeting reconsidered? A survey of
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75.
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Phillips, L.D. and e Costa, C.A.B., 2010. Transparent prioritisation, budgeting and resource
allocation with multi-criteria decision analysis and decision conferencing. Annals of
Operations Research. 154(1). pp.51-68.
Sintomer, Y., Herzberg, C. and Röcke, A., 2011. Participatory budgeting in Europe: potentials
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Truong, G., Partington, G. and Peat, M., 2010. Cost-of-capital estimation and capital-budgeting
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Wampler, B., 2010. Participatory budgeting in Brazil: Contestation, cooperation, and
accountability. Penn State Press.